City money drives farmland prices up

Investors see farmland as a lifestyle choice and a hedge against tough times — and they like the tax breaks

If a dirty bomb ever explodes in London, you should grab all the gold you can carry and escape to a plot of farmland in the country to sit out the aftermath. This, more or less, is the advice of “Dr Doom”, Marc Faber, a Swiss market pundit and investment guru who this week told investors that arable farmland was second only to precious metals as a haven for their money.

The value of farmland is already above its 2008 peak, at a time when City investors are buying more arable land than career farmers.

“City money is certainly being invested in farmland,” says Sarah Macdonald-Smith, of Strutt & Parker. “Everybody says they want lots of acreage and want it to be relatively accessible. Investing in farmland feels secure, there are plenty of tax breaks, and food security is also on everyone’s lips at the moment.”

Although yields from farmland are typically as low as 2 per cent, farmland is popular because it can be an investment and a lifestyle purchase. Last year, a quarter of all farmland sales were made by “lifestyle purchasers” looking for attractive plots, according to Knight Frank.

A City fund buying farmland purely as an investment is more likely to want a plot of flat, manageable land somewhere in the east of England, with no animals and simple crops. But a private individual may choose something prettier, with rolling hills and animals to tend or some woodland in which to go shooting. Though dairy farms can provide a good return, they require a larger investment (in cows, quite apart from anything else) and greater expertise, so attract fewer investors from outside the sector.

A Knight Frank report shows that farmland has outperformed country houses, prime Central London property and the market in general during the past decade, and it is second only to gold as a safe haven for funds during difficult times. Farmland prices have increased by 164 per cent in the past decade, while the amount of farmland advertised for sale fell by 30 per cent in 2009.

Growing populations and dwindling resources, combined with high food prices, make arable land increasingly precious. Research by Strutt & Parker shows that, in the past seven months, 76,000 acres of land entered the market while more than 83,000 acres were sold.

Andrew Shirley, head of rural land research at Knight Frank, says: “A shortage of land for sale was one of the key drivers of the market in the past decade and it continues to underpin values now.

“As the world population grows, eating habits change and more farmland is lost to development and degradation, the investment rationale behind farmland will remain strong.”

He says: “An investment in farmland is not as simple as clicking a button to buy or sell shares. It needs careful management and increased capital to pay someone to run your farm. But if you manage it actively, you don’t have to pay inheritance tax on your farm, and also not on part of your house, if you can show you are using it to run the farm.”

There are three forms of tax relief open to owners of farmland.

If you actively farm your land (whether personally or through employees), all the land you farm, together with a portion of the farmhouse — normally a third — is exempt from inheritance tax. You can also qualify for entrepreneur relief, which means that you pay a reduced rate of 10 per cent capital gains tax on your first £1 million of gains, before the rate returns to the standard 18 per cent level.

A third benefit is that “gentleman farmers” — with other jobs and sources of income — can offset farm losses against their other income.

Mike Warburton, a tax expert at Grant Thornton, says: “If you’re a banker who makes a £100,000 loss on his hobby farm, you can set that loss against your £1 million bonus and only pay tax on £900,000 of your bonus. But if you’re still not making a profit after five years, they [Revenue & Customs] will start to question your tax relief.

“These tax reliefs are available in a number of ways,” he says. “You don’t actually have to put on green wellies and go out to milk the cows. If you have employees farming the land or contract it out to a neighbouring farmer, you can still qualify — as long as it is still you who is taking the business risk.”

Even if you keep a big grassy meadow to feed a herd of sheep, you can qualify for tax breaks.

In his speech to a gathering of fund managers in Tokyo this week, Dr Faber also suggested that a house in the countryside would be a good place to hide from a “dirty war” in the cities, which could be more disruptive to the economy than a volatile market. When fleeing to your newly purchased plot of farmland from poisoned water supplies and biological attacks, precious metals are easy to carry, he said.

“I’m a little less pessimistic than Dr Faber about biological warfare,” said Mark Lawson, a partner at the Buying Solution agency, “but farmland is a tangible asset that you can see and touch, which is comforting in this economic environment.”

A rare opportunity for you to own a parcel of land within a much sought-after area of Surrey with a significant need for housing. Totalling just under 20 acres, the land is for sale freehold as a whole or in lots.